Parting Ways with Paul Krugman on Social Security

For a while, Paul Krugman was making more and more sense to me. It had me worried, because I remember distinctly feeling more and more alienated by his commentary in the past 5+ years. But since I don’t follow him that closely, the reasons why were fading from memory.

This article snapped them back into clarity. Oh boy, is this column off-base.

I think the point of his column here was to effectively claim that there is no social security crisis, that social security is doing just fine, and that the arguments against it are contradictory and specious. I’m not really sure, though, because the point of the column kind of wanders.

In any case, he is right about one thing: the arguments against the stability of social security do contradict each other. Unfortunately, what is good for the goose is good for the gander… Krugman’s arguments seem to also contradict themselves.

The fundamental argument that is correct, unfortunately, is that Social Security is going to start doing some serious damage to the Federal Budget, starting around 2018.

Krugman is correct that there is, in fact, a Social Security surplus, engineered as part of the Federal tax changes made in 1986. This surplus, however, is not saved in any sort of marketable assets. Instead, these trillions of fictional dollars have already been spent as part of the regular annual budget (yes, even after that we still run a deficit), leaving in their place special US Treasuries, redeemable in the future by the US Government.

What Krugman misses here is that US Treasuries are just an IOU that the US Government is writing to itself. US Treasuries are in fact a great asset to invest in for every single entity other than the US Government. It’s as if you decided to buy a car today by lending yourself the money. Yes, it is that silly. Guess what happens when the right hand goes back to the left hand to get payment on that loan?

How can I say that, given Social Security’s $2.3 trillion (and growing) trust fund? It’s because the fund owns nothing but Treasury securities. Normally, of course, Treasury securities are the safest thing you can hold in a retirement account. But Social Security’s Treasuries won’t help cover the program’s cash shortfall, because Social Security is part of the federal government. Having one arm of the government (Social Security) own IOUs from another arm (the Treasury) doesn’t help the government as a whole cover its bills.

Here’s why the trust fund has no financial value. Say that Social Security calls the Treasury sometime in 2017 and says it needs to cash in $20 billion of securities to cover benefit checks. The only way for the Treasury to get that money is for the rest of the government to spend $20 billion less than it otherwise would (fat chance!), collect more in taxes (ditto), or borrow $20 billion more (which is what would happen). The spend-less, collect-more, and borrow-more options are exactly what they would be if there were no trust fund. Thus, the trust fund doesn’t make it any easier for the government to cover Social Security’s cash shortfalls than if there were no trust fund.

I think Krugman does a real disservice here by pretending that this fact is some sort of charade cooked up by people who want to privatize social security. The fact is that social security, in its current structure, is part of the general budget. It has no marketable assets beyond those US Treasuries, which the US issues at its discretion anyway. The US has no sovereign wealth fund in marketable assets. That means in 2016/2017 or so, we’re going to start having to pay the piper. According to the Social Security Administration, the tab will be $96B in the red in 2020.

Sure, we can fund it with higher taxes. Or lower spending. Or both. But it’s going to start hurting as soon as it goes negative.

There are a lot of potential solutions here – but none are easy, and none erase the fact that we effectively spent our $2.3 Trillion surplus before we were supposed to. We’re going to have to pay it back, one way or another, or we’re going to have to radically rethink Social Security.

So, my apologies Mr. Krugman, but we do, in fact, have a Social Security crisis and a general budget crisis in the making. And it’s going to be in the next decade, not in 2042. My generation is going to end up paying a lot more for a lot less, assuming we even have a claim on assets at all when it’s all said and done.